Market Performance of Costco in Canada - Case Study Example

?Costco Canada: Case Study By Economic Perspective Costco is a retail business in which retail goods are offeredon a discount warehouse membership basis. Costco’s largest and long-running competitor is Sam’s Club, a similar business model owned and operated by Wal-Mart. Costco’s business model is founded on the company’s mission statement which is “to continually provide our members with quality goods and services at the lowest possible prices” (Thompson, Strickland, & Gamble, 2008, p. C-3). In this regard, Costco’s business model was based on generating “high sales volumes and rapid inventory turnover” by providing members with “limited” choices in local brands and privately produced products in several classifications at low prices (Thompson, et. al., 2008, p. C-3). While this business model has been entirely successful thus far, the provision of limited choices can be problematic in the long-term. With globalization consumers are increasingly confronted with a variety of choices. Therefore shopping in an environment with limited choices may go against what modern consumers have come to expect and prefer. Costco’s business model has nevertheless been successful so far. For example in 2006, total sales in Costco’s 496 stores worldwide amounted to US$ 59 billion. Membership included 26 million private members and 5.2 million business members which amounted to US$1.2 billion in fees for Costco membership. Each of Costco’s stores realize sales each year at an average of US$128 million while its closest competitor Sam’s Club realizes only US$67 million annually (Thompson, et. al., 2008). However, since Costco and Sam’s Club are based on the same business model, the disparity in sales might be a matter of concern. Costco can expect that at some stage Sam’s Club will attempt to take some of Costco’s market shares and the sales’ positions can be reversed. Therefore Costco may want to keep a close eye on Sam’s Club and keep an eye on its target consumers to ensure that it is meeting their needs, expectations and preferences better than Sam’s Club at all times. Costco’s expansion is evidenced by its progressively increasing operating sales, membership and year-end sales from 2000-2006. For example, operating costs increased progressively from US$1,037 million in 2000 to US$1,626 in 2006. However, net sales and membership fees together increased from US$32,164 million in 2000 to US$60,151 million in 2006 showing progressive increases from year to year. At the end of 2000, Costco had 313 stores operating worldwide and by the end of 2006, Costco had 458 stores. Membership has also followed a similar pattern, increasing each year from 2000-2006 (Thompson, et. al., 2008). Although membership is a big part of the business model it is a more significant marketing strategy and will be critiqued in the next section. The successful business model of offering quality goods at low prices is enabled by the warehouse membership set-up. By taking this approach, Costco is able to save the cost involved in in-store decorum and in-store customer service. In fact, Costco’s various warehouses typically display bare cement floors and shopping is designed like a “treasure hunt” experience (Thompson, et. al., 2008, p. C-6). Moreover, Costco offers limited products in volumes to lower the cost of inventory and floor management. For example, a typical supermarket or supercenter such as Wal-Mart or SuperTarget will offer between 40, 000 and 150,000 items while Costco offers only 4,000 items (Thompson, et. al., 2008). Thus far, Costco’s business model has been successful, however increasing competition indicates that Costco might have to consider revamping its business model. For instance, Costco’s largest business rival, Sam’s Club and BJ’s both use a similar business model. Both Sam’s Club and BJ’s have similar in-store lay-outs, offer about 4,000 items and feature the treasure hunt experience in which luxury goods are available at lower prices for a short period of time. In fact, Sam’s Club offers even cheaper luxury goods (Thompson, et. al., 2008). This could be pose a potential threat to Costco’s treasure hunt strategies. Moreover, competition comes from other businesses such as Home Depot, Lowes, Circuit City, Best Buy, and other businesses that offer some of the same treasure hunt items that Costco offers in larger varieties at lower or competitive prices. In addition, other businesses such as Target, and supermarkets offer the same grocery items that Costco offers in larger varieties and in smaller quantities so that customers of all means and needs have a more viable alternative than Costco. Marketing Product selection and pricing are among the main marketing strategies used by Costco. Product selection is expanded by offering complimentary businesses either within or annexed to a majority of Costco warehouses. The idea is to ensure that members shop at Costco more often. The types of complimentary businesses include food courts, hot dog stands, one-hour photo centers, optical centers, pharmacies, gas stations, hearing aid stores and print shops (Thompson, et. al., 2008). While variety is good in that it positions Costco as a one-stop shop, it presents a problem. The variety will not only encourage shoppers to do all of their shopping at Costco, but it will also shoppers to visit Costco or its complimentary shops and can therefore create a lot of traffic in and out of Costco. Moreover, another source of traffic arises out of the on-line shopping which allows consumers to purchase products online and then pick those products up at the actual warehouse shop. With the volume packaging, consumers require the space to drive up and collect items at the door. With all the traffic in and out of the parking lot and in and out of the shop itself, parking and pick-up can be problematic and can result in a downturn in patronage. On a typical day, customers usually rush to find a parking space close to the entrance and this creates confusion and congestion. Costco could alleviate the parking problem by hiring and training parking lot attendants to direct traffic and to keep order. Product selection is also characterized by “treasure-hunt merchandising” (Thompson, et. al., 2008, p. C-6). Although Costco only offers about 4,000 items, ? of those items are persistently changed. Costco’s strategy is based on finding and selling “one-time purchases of items” that would “sell out quickly” (Thompson, et. al., 2008, p. C-6). A number of these one-time purchase items are “high-end or name-brand products” that have high prices and include HDTVs for between US$2000 and US$3,500 or leather sofas prices at US$800 (Thompson, et. al., 2008, p. C.6). This marketing strategy is designed to motivate greater spending by offering customers “irresistible deals on luxury items” (Thompson, et. al., 2008, p. C-6). While 3,000 of the items are always displayed on the floor, the remaining 1,000 items are the treasure-hunt items that are constantly changing. Thus customers may have a need to purchase the treasure-hunt items since they are aware that those items will not always be available (Thompson, et. al., 2008). On the other hand, consumers may take the position that it may not be worth it to rush to Costco and fight traffic for a product that might not be in-stock due to its fast-moving nature. Since most of the products are offered at specialty stores with similar prices, and with a lot more choices, consumers may prefer to take their chances in a less congested shopping environment with better in-store ambience and more customer service personnel available. In fact, many stores such as Best Buy and Circuit City promise consumers that should they find an item offered by them at a lower price elsewhere, they will match the price. For example, a consumer, with knowledge of a HD TV at Costco may forego the traffic congestion at Costco or the risk that the HD TV is no longer available, and go to Best Buy, assured that they will get the same TV at the same price without have to rush or fight the traffic. The low prices offered by Costco, together with its reputation for treasure-hunt merchandising has minimized the extent to which Costco is required to advertise. Marketing including promotions are typically confined to “direct mail programs” which promote specific products among membership (Thompson, et. al., 2008, p. C-7). At times, Costco mails promotions to non-members and will run promotional programs upon the opening of a new warehouse. In the opening of new warehouses, Costco’s marketers will usually contact nearby businesses and supplement those contacts with direct mail prior to the opening with a view to enticing these businesses into becoming members (Thompson, et. al., 2008). While this has proven to be an effective strategy thus far, it may not hold in the long-term. These kinds of strategies seem to be only aimed at existing customers and a narrow range of non-members. Direct mailing and hard print media can only cover so many non-members. In order to reach a wider range of consumers and to gain an edge on the competition, it will be necessary to regularly use television and radio advertising. Social media two-way communications can also be useful for gauging consumer preferences and expectations. Costco’s target market is among the “most affluent customers in discount retailing” averaging between US$75,000 and US$100,000 annual income (Thompson, et. al., 2008, p. C-9). A majority of Costco’s customers reside in the nicer neighborhoods that are near Costco’s warehouses. Another important marketing strategy that ensures that Costco attracts the more affluent demographic is the membership strategy. Individual and business memberships are available at US$50 annually. Gold Star individual membership available at US$50 also includes a spouse. Business membership allows an additional 6 partners to obtain membership at US$40 annually. Gold Star membership can be improved to Executive membership for US$100 annually and this will entitle the member to an annual 2% savings on products purchased (Thompson, et. al., 2008). Obviously, the membership strategy has worked well for Costco and its competitors. However, since Costco and other warehouse shopping markets tend to offer only a select number of items and only sell in bulk aside from the larger luxury items, the incentive for membership may not always be present. Members and non-members may to discouraged by the necessity of purchasing bulk items and the need to purchase membership when they can gain similar savings advantages without having to purchase membership and bulk items elsewhere. For example, Winn Dixie offers shoppers a free Winn Dixie reward card for which shoppers automatically pay a discounted price on in-store items and are not required to purchase large quantities of goods. Moreover, coupons are usually only mailed to members or are only available at the warehouses. This may be inconvenient for consumers who are travelling and wish to shop at Costco and are not aware of the existence of coupons since they are not receiving their mail while travelling. There are also a lot of shoppers that do not remember to check for coupons at the store and quite often are unaware that coupons can be picked up at the store. It might therefore be a good idea to provide coupons in the daily newspapers. Consumers might be persuaded to shop elsewhere when coupons offered by other stores are readily available in the daily newspapers. Thus Costco can lose sales to other stores that make their coupons readily available to the public at large and thereby offer discounted prices on goods offered for sale at Costco. In order to accommodate the various spending habits of customers, Costco accepts a variety of payment methods including cash, checks, a majority of the debit cards in circulation, American Express, and Costco’s own credit card. When checks are not honored, Costco safeguards against losses by the implementation of a policy in which the customer who has presented a dishonored check is not allowed to use a check until the dishonored check is discharged (Thompson, et. al., 2008). The problem with the payment acceptance however, is that Costco only accepts American Express credit card although it accepts all major debit cards. What this means is that a customer wishing to use a Discover Card or any other credit card will not be able to use it and thus the range of customers are limited. Complicating matters customers wishing to use a check will not be able to use the check if the information on the check does not match the information on their membership card. Thus customers who change addresses after obtaining membership cards and who have not requested edited membership cards cannot use checks. Identification should be the only criteria for accepting a check and this would possibly increase the number of shoppers and therefore increase sales. Bibliography Thompson, A. A. Jr. Strickland, A. J. III and Gamble, J. E. (2008). Crafting & Executing Strategy: The Quest for Comparative Advantage: Concepts and Cases, 16th Edition. McGraw-Hill Higher Education. Read More